v8 n1

Section Review

Good faith and application of the
so-called "escape clause": A cautionary tale

By Michael J. Splaine

Every attorney who has been involved in representing a buyer or seller of residential real estate is familiar with the Standard Form Purchase and Sale Agreement. When drafting, reviewing or modifying such agreements or attaching buyer/seller specific addendums, lawyers strive to protect their clients by covering all of the bases.

An important element of the Standard Form Purchase and Sale Agreement (actually all agreements) is time constraints and how they are addressed, particularly where the agreement contains an escape clause, whereby a closing may be extended, and also contains a clause reciting that time is of the essence. Failure to properly address these potentially conflicting clauses may result in a failed sale, loss of deposit, and litigation - including assessment of costs and legal fees against the losing party - all of which could be avoided with proper attention and good advice.

The topic of this article and what was at issue in Love v. Pratt, 64 Mass. App. Ct. 454, 833 N.E. 2nd 674 (Mass. App. Ct. 2005), was the seller's right to extend the closing versus the buyer's right to insist on the stated closing date.

Paragraph 10 of the Standard Form Purchase and Sale Agreement gives a seller a right to extend the time for performance for 30 days if the seller is unable to give title or make the premises conform at the time of closing, provided that timely notice is given.

In Love v. Pratt, the buyer, Anne Love, filed suit against the seller, Richard Pratt, for return of her deposit following a failed real estate sale in which Pratt claimed Love's deposit after she refused to close at a later date.

Pratt's actions in seeking to extend the closing, or "scoop the deposit," if Love refused, suggested to this writer that he never thought he would be held to the original closing date, either because he believed paragraph 10 amounted to an automatic right to extend upon the giving of timely notice of his intentions, or because he was simply "playing hardball" in the hopes that the buyer would relinquish her right to insist on the agreed closing date. In either case, it appeared Pratt did not have an honest and sincere intention to carry out the agreement according to its terms, which is exactly what a Superior Court judge held in deciding for Love on cross motions for summary judgment.

On appeal by Pratt, the Court of Appeals upheld the decision of the Superior Court judge, finding that the seller's conduct in seeking to extend the closing and retain the buyer's deposit of $37,125 was tantamount to bad faith. The appeals court also ruled that the appeal was frivolous, and on the court's own motion, ordered Pratt to pay Love's legal fees for the appeal, as well as double her costs.

Facts

Anne Love and Richard Pratt entered into a purchase and sale agreement by which Love was to purchase Pratt's home for $742,500. The agreement recited a closing date of March 14, 2003, and stated "time was of the essence." Love was selling her own home and had to be out by that same date. During negotiations prior to the signing of the agreement, Pratt, a builder who was in the process of building a new home for himself, wanted Love to agree to include language that would give him a right to extend if he did not have suitable housing. This was not agreed to by Love and was never part of their agreement.

Eight days prior to the closing, Pratt, by letter from his attorney, attempted to unilaterally extend the closing date 30 days, citing only that he was doing so pursuant to paragraph 10 of the purchase and sale agreement. Love, through her attorney, objected to any extension unless Pratt would pay for a hotel stay and pay to place her things in storage until the extended closing date.

Pratt refused to pay Love's living and storage expenses in exchange for an extension, stating that since he was unable to find housing, he could not close. Furthermore, he threatened to retain the deposit if Love did not agree to an extension.

Love refused to agree, maintaining that Pratt did not have a right under the agreement to extend the closing until he could find suitable housing and she was holding Pratt to the original closing date of March 14. The parties never closed on March 14. Love sold her house that day, placed her property in storage, and stayed at a hotel until she could find other living arrangements.

Pratt insisted he had a right to extend under paragraph 10, since the premises did not conform for reasons that he could not deliver the property free of tenants (himself, his girlfriend and roommate) as required by paragraph nine of the agreement, and he gave power of attorney to a lawyer whom he instructed to appear at the registry of deeds on his behalf to close on the later date. Both parties claimed the deposit, which was being held in escrow, and Love filed suit in Superior Court seeking a return of her deposit plus costs. Pratt counterclaimed, seeking to keep the deposit as liquidated damages. On cross motions for summary judgment, the Superior Court ruled in favor of Love, finding Pratt had no right to extend under paragraph 10 and that time was of the essence.

The Superior Court judge noted that Pratt could have easily done what Love did, which was to move into a hotel and put his things in storage.

Pratt appealed the summary judgment of the Superior Court, essentially reiterating on appeal that he had a right to extend under paragraph 10 of the purchase and sale because he could not deliver the premises free of occupants.

The Appeals Court decided the case in favor of Love and upheld the Superior Court decision. The appellate court found the agreement was clear; that time was of the essence, and that the seller knew for several months prior to closing that he and his occupants would have to vacate but did not make a sufficient effort to do so.

The Appeals Court also noted that the fact that the seller's new house was not ready did not fall within the category of unanticipated circumstances and that the seller's actions resembled a lack of good faith and an absence of any intent on the part of the seller to carry out the agreement in accordance with its terms.

Discussion

Shortly after entering this case for the buyer, Anne Love, and reviewing the purchase and sale agreement and the subsequent correspondence between counsel, I readily formed the opinion that the buyer was clearly entitled to the return of her deposit. The agreement stated that time was of the essence and it appeared the seller's reliance on paragraph 10 was misplaced. After all, there were no unanticipated title or zoning problems, no claim, initially at least, that Pratt could not deliver the premises free of tenants (paragraph nine of the purchase and sale agreement required the premises be free of tenants), and no showing that he had expended reasonable efforts to remove himself and his tenants. In other words, nothing suggested that the seller had made a good-faith effort to perform. I immediately wrote a letter to counsel for the seller demanding the deposit. The seller not only refused to return the deposit, but refused to negotiate.

My next thought was, "Perhaps I'm missing something." But the more I looked at the facts, which were not in dispute, and the agreement, which was clear in its terms and applied same to the case law, the more I was convinced that the other side was operating on the misplaced belief that paragraph10 gave the seller a much broader right to extend than it affords. Indeed, I have heard some real estate brokers mistakenly refer to paragraph 10 as an automatic right to extend. This is not so, and the case law talks about the requirement of good faith when relying on the "escape clause."

A good example is LaFond v. Frame, 327 Mass. 364 (1951), where the seller refused to obtain a discharge of mortgage, which was easily obtainable, and thereby sought to avoid the closing by invoking the "escape clause." The court stated: "…the escape clause is no protection to an owner who was not acting in good faith…" Since Love had herself at all times acted in good faith, even willing to extend the closing if the seller would pay to put her things in storage and pay for her lodging, she had every right to insist on the agreed time of closing if Pratt would not accommodate her. On appeal, the Appeals Court noted the cost to Pratt to obtain Love's assent would have been in the vicinity of $7,000, and in terms of a $742,500 sale, was de minimis. Unfortunately for Pratt, he did not think he needed Love's permission to extend.

It is true that cases turn on the facts, and no doubt, the result could have been different if the agreement did not state, "time is of the essence." SeePreferred Underwriters, Inc. v. New York, N.H. & H.R.R., 243 Mass. 457(1923) ("when parties agree in writing that time is of the essence, courts will hold parties to the deadlines they have imposed upon themselves…"). What if the parties had continued to negotiate after the expiration of the deadline? SeeMcCarthy v. Tobin, 429 Mass. 84 (1999), and Church of God in Christ, Inc. v. Congregation Kehillath Jacob, 370 Mass. 828 (1976), as to continued dealings after the deadline as a waiver of "a time is of the essence clause."

In Love v. Pratt, the facts were not in dispute and the agreement was clear, as was the law governing the terms of the agreement at issue. So then, how is it that the agreement broke down and the parties ended up in litigation?

You could say, "That's clients for you," or you could say wise counseling means taking a hard look at what your clients want versus what is in their best interest.

Finally, the buying and selling of clients' homes are generally emotional events that can occur over a period of months, during which time, issues will likely arise. When evaluating such issues, represent your clients passionately, while at the same time advising them objectively, according to standards of good faith and fair dealing.